Layaway or Credit: Which Is Best?

Layaway or Credit: Which Is Best? article image.

A major purchase can throw even the most carefully planned budget for a loop. Often, shoppers choose to take home a big-ticket item and use credit to pay it off over time, but for many, this either isn't desirable or isn't an option. For those shoppers, their best option may be to pay it off first and take it home later, a system retailers use called layaway.

Layaway is an agreement between a customer and a retailer that an item will be paid off over time (usually two to three months) before a customer takes possession. A layaway purchase won't incur interest, but you'll usually pay a small fee. It's distinct from traditional financing because it is not an extension of credit.

How Does Layaway Work?

Imagine you're in the market for a refrigerator to replace one that seems to be on its last legs. You find a great one for $1,000 at your favorite department store. Unfortunately, cash is tight and you either can't or don't want to use a credit card. Rather than give up, you may be able to buy it using layaway. Here's how it would work: After making a down payment of $100 plus a $5 service fee, you agree to pay the remaining $900 in four equal monthly installments of $225. After four months, the refrigerator is yours to take home.

Terms may differ depending on the retailer, but that's generally how all layaway plans will go.

Limitations or requirements on layaway can include:

  • Some products may be excluded, such as gift cards, sale items and fine jewelry.
  • The store "holds" the item for a specified length of time. Layaway plans can be 30 days on up to many months.
  • A payment schedule is set. You may have to make weekly or monthly installment payments.
  • There may be a minimum purchase price, such as $50 or $100.
  • Fees may be imposed, which could be a nominal amount to set up the service, and for cancelation and restocking.
  • Layaway items generally can be paid off early.
  • Canceling a layaway may incur a fee.

Can Layaway Impact Your Credit Score?

Layaway plans have zero impact on your credit scores. The store does not check your credit report to see if you qualify, so a hard inquiry won't be posted on your credit report, and a layaway agreement won't show up as positive payment history.

Additionally, layaway plans do not show up as any kind of debt on your credit report. Late payments won't hurt your credit scores, either. Since the amount won't show up on your credit report, your credit utilization ratio (the amount you owe compared with the amount you can charge) won't change. For these reasons, layaway plans have a neutral effect on your credit.

One downside to layaway is that your on-time payments won't improve your credit score. Since stores do not report your layaway payment history to the three major credit bureaus (Experian, TransUnion and Equifax), don't expect your credit score to change.

How Is Layaway Different From a Credit Account?

A layaway plan and a credit card are similar only on the surface. Before you enter into either arrangement, understand the important distinctions between the two.

For both layaway and credit cards, you'll be paying over time and sending at least a minimum payment amount. If you fail to meet the terms of the agreement, at least some penalties and fees will be assessed.

With a credit card, though, your purchase will go through immediately because you're using a lender's money—not yours—to pay. Interest is added to the balance if you carry it month to month. Credit cards may be used continually for additional purchases until the account is closed.

With layaway, there are no interest charges. You are drawing from your own funds to pay, but you must complete every agreed-upon payment before the item on layaway is yours to keep. A layaway agreement covers one item; any additional layaway agreements must be made independently.

Should You Use a Layaway Plan?

For an item you need right away, layaway is inconvenient; but if you can wait, it's an alternative to using credit. Layaway can be smart for budgeting purposes. You can parcel out your payments and integrate them into your spending plan. Layaway also prevents you from opening a credit account that has the potential to balloon out of control.

Some buyers may find it more beneficial to use a credit card. Using a credit card to make a major purchase helps you build a positive credit history—which will positively factor into your credit scores. Depending on the card, you may even net some cash back or points that go toward rewards.

If you'd like to use credit, but don't have a credit card or an established credit history, consider opening a secured credit card. With a secured card, you set money aside with the issuer as a deposit, and you'll have access to a credit line that matches that amount.

It's great to have options. A layaway plan can be great when you don't need to have something urgently. Credit is a good alternative when you need something now and will pay it off quickly. If you're concerned that you may not qualify for a credit card or loan because of past problems or mistakes, check your Experian credit report. It's free, and it will give you a look at what in your credit is working for you and what may be working against you.